Demand and Demand Curve

An individual’s or a household’s decision about the quantity of a particular good to demand depends on many factors including: the price of the good in question, the current income and accumulated wealth available to the individual or the household, the prices of related goods, the tastes and preferences of the individual, and the individual’s expectations about the future income, wealth, and prices.

A budget constraint is 'the combinations of quantities of X and Y that a consumer can purchase with certain amount of income or earning'. The answer is D.

Budget Constraint

If the price of one good increases, the budget line shifts inward, pivoting from the other good’s intercept. If the price of one good decreases, the budget line shifts outward, pivoting from the other good’s intercept. Effect of Change in the Price of Good X on Budget Line: If the original budget line is in the middle, an increase in the price of good X shifts the budget line outward and a decrease in the price of good X shifts it inward.

Broadly speaking, there are two types of markets: Product markets and factor markets. In the first one, all sorts of goods and services from cars to movie tickets are bought and sold. The other one involves factors of production such as land, labor and capital. When you are offered a consumer loan, you are in a capital market. When you try to get a job, you are in a labor market. If you want to buy a piece of land or house by the Aegean coast for your retirement, then you are a participant in the land market or real estate market.

As it is understood the correct answer is “B”. A graduate who has applied for a position in a company is in labor market and a student who is offered a student loan is in capital market. Markets such as land, labor and capital markets are factor markets. A person who wants to buy a car, a student who is trying to buy a ticket for a concert and a person who goes shopping are in product market.

When a change in income affects the demand for a good positively or in the same direction, that good is called a normal good. The exceptions are called inferior goods. The answer is C.

The study of who bears the burden of taxation is called tax incidence. The effects of taxation on market can be summarized like this: Firstly, a tax creates a wedge between the price that buyers pay and the price that sellers receive. The wedge is equal to the tax. Secondly, regardless of whether the tax is levied on buyers or sellers, the effects of taxation are the same: the price that the buyers pay rises and the price that the sellers receive falls. Finally, the tax also reduces the market size by reducing the equilibrium quantity. The correct answer is B.

The Latin term ceteris paribus describes an assumption which allows for a change in only one variable at a time. In other words, when there is a number of different factors that determine an outcome, we assume that only one can change and all the others are held constant. Thus, in this case, the price is changing while the other determinants of demand are assumed to be unchanging. As understood the correct answer is “A”.

The PPF is a very useful analytical tool to illustrate the basic economic concepts such as scarcity, efficiency, tradeoffs and opportunity cost. It could even be used to illustrate economic growth, another frequently used economic concept, in the form of an expansion in the production possibility set of an economy. Future prospects are related to the decision made using PDF. For this reason the correct answer is “C”.

Macroeconomics is the branch of economics that examines the aggregate behavior of economic agents and the government on a national scale. The correct answer is E.

Scarcity arises from the limited nature of society’s resources compared to unlimited needs and desires. Our resources are limited relative to our needs, and this is true not only for individuals but also for societies. Scarcity refers to the society’s inability to produce all the goods and services people desire to have because of deficiency of resources. Societies therefore must also decide on their priorities and manage their resources accordingly with the priorities they set.

As it can be understood the information given the term “scarcity” would be used to describe that situation. The correct answer is “A”.

Two goods are said to be complements if they are generally or necessarily consumed together, such as tea and sugar cubes or printers and ink cartridges. As some of you might remember, Nokia cellular phones were once very popular in Turkey. Almost everybody had one back then, but currently only few people have a Nokia. The company went bankrupt. However, no one would be interested in buying a Nokia even if it survived. Apple and Samsung have become the popular suppliers of cell phones today. This is an example for the shift in tastes and preferences of the customers. The correct answer is Choice D.

A product is said to be inferior if the demand for that product goes down when the income of the
consumers increases. Consumers prefer to buy higher priced substitutes in place of the inferior goods when their income rises. Examples of inferior goods may be ordinary (white) bread, cheap cheese (“lor”) or fake brand (imitation) jeans. If income increases, the demand curve for the inferior good will shift down to the left.

The law of diminishing marginal utility is that the marginal (or additional) utility derived from consuming successive units of a product will eventually decline as the rate of consumption increases. For example, a consumer eats 5 apples one after another. When he eats the first one he will have the maximum marginal utility (satisfaction). When he eats the second and third apple, the marginal utility of each additional apple will be lesser. This is because with an increase in the consumption of apples, his desire to consume more apples falls. Therefore, this example proves the point that every successive unit of a commodity used gives the utility with the diminishing rate. The correct answer is D.

When the real interest rate starts to decline, because of the lower level of opportunity cost of holding money, individuals become more willing to spend money for goods and services, instead of saving. This negative effect of the real interest rate on the saving rate is called the “Substitution Effect”. This effect indicates that there is a trade-off between saving and spending for consumption goods concerning changes in real interest rates. The correct answer is B.

Indifference curves are always convex, any two bundles of goods can be compared by the consumers, indifference curves slope downward to the right, moving along the indifference curve does not change the utility, indifference curves cannot cross each other. The true answer is E.

Price ceiling is a legal maximum on the price at which a good can be sold. As indicated before, the most well-known price ceiling policy is conducted by the rent controls in real life. Without the government intervention, the market equilibrium price and quantity for rental places will be determined by the demand and supply. Assume that in a town, the unregulated rental market price is 1000 TL and with this price 1000 apartments are rented out. If the policymakers think that this market price is unfair and the fair rental price should be 750 TL and imposes this price for rental places, the market outcome will be altered.

Price elasticity of demand is also affected by how the consumers view a good or service a necessity or luxury for themselves. Necessities tend to have inelastic demand and luxuries tend to have elastic demand. Education and health services (doctor visits), heating in the winter, gasoline for car owners are considered necessities for consumers and these items have inelastic demand since the case of price increases in these items gets small reactions from consumers to cut their quantity demanded. On the other hand, for the items that is considered as luxury for the consumers, a price increase gets a substantial response from the consumers’ demand. Please notice that whether a good or service is a necessity or luxury is determined by the tastes and preferences of the consumer.